TRUMP AND ECONOMICS

March 5, 2018

TRUMP AND ECONOMICS

The topic for discussion on Professor Kennedy’s blog today was Trump’s ignorance of economics and in particular, his proposal to place tariffs on imported steel and aluminum. She asked for commentary, and the following, slightly edited, was my contribution.

Supply and demand even before Adam Smith was never a perfect measure of trade costs or a foundation for mythical free market theory, but it was perhaps the best we could do coming out of late medieval times into an industrial economy powered by steam, which changed everything. Trouble is, as applied today and in re Trump’s tariffs, and as Joseph E. Stiglitz writes in his books, tariffs distort the economy, one which we had hoped would have a degree of market normalcy in obedience to the theory of supply and demand. Tariffs reward or punish trading partners based on domestic political concerns and supposed unfair treatment by one of the other, and thus corporate efficiency, the law of comparative advantage and other so-called iron rules of economics become secondary to politics and not economic systems, whether socialist or capitalist. Result? Higher prices, inflation, unemployment etc.

Trump (apparently in a fit of pique) had no good reason to invoke Section 232 (empowering him to act as a matter of national security in setting tariffs) since I think all of us can agree that Canada and Mexico (who are badly affected by his proposed tariffs) are not likely to invade the United States. To further destabilize the equity, debt and commodities markets, he is now threatening to withdraw from the WTO (World Trade Organization) if they rule against his tariff-setting. Good luck on the Dow and the millions employed in our export industries.

It appears Trump is intent on bullying the world of global trade but this is not 1950, when the rest of the world (notably Europe and Japan) depended upon the United States to rebuild their ruined cities and rescue their war-torn economies. The EU, Japan and now China and some emerging economies are stern competitors in their own right in the global marketplace, and other than the United States as a market, are not all that dependent on us as they once were. They are in a position to trade among themselves as proven by China and Germany, the two leading countries in the world enjoying hundreds of billions of dollars in trade surpluses annually, while we are by far the leading trade deficit country in the world with trade deficits in the hundreds of billions of dollars annually, including within such number a deficit of over a billion dollars a day to China alone.

The promised retaliatory tariffs against our export and other industries resulting from Trump’s tariffs will increase our already stratospheric deficits and are certain to enhance unemployment in our export industries far out of proportion to the steel and aluminum jobs his tariffs “save,” including but not limited to hundreds of billions of dollars lost to investors as the Dow and employment tank, consumer prices inflate, we endure endless recession and the income and wealth in productivity which would otherwise have accrued to us from our economy is lost forever, etc.

Wake up, Don. Our trading partners have options. American exceptionalism, if it ever existed, is now defunct. It’s over. This is not 1950. You cannot wall out competition in a global economy, and unlike then, we now have competition – strong competition. Let’s forget tariffs and other forms of protectionism and adopt policies that make our businesses more efficient so that they can compete in this global economy, starting today. GERALD E